“The big companies, like the Pfizers and the Intels, have already started implementing [Sarbanes-Oxley], just to be in the forefront,” says Amar Budarapu, chairman of the U.S. securities practice group at law firm Baker & McKenzie. “For a Fortune 100 firm, that’s not that big a deal.” But Budarapu adds that many smaller companies, “with legal staffs of two or three people,” are taking a wait-and-see approach until the dust settles.
Squeeze the Clients?
When those smaller companies can wait no longer, what will they see? “I expect audit fees to go up 25 to 30 percent,” said Mike Starr, the U.S. managing partner for strategic services at Grant Thornton (number 5). But the pass-alongs initiated by Sarbanes-Oxley may be only the beginning.
The same professional and ethical questions that inspired Sarbanes-Oxley, and that dogged Andersen out of existence, have brought all accounting firms under “significant scrutiny,” says Starr. Those firms are themselves learning that one of their key cost components, liability insurance, may be in for a steep increase. Those costs “have gone up over 50 percent in some cases,” says Starr; according to Crowe Chizek’s Hildebrand, they “could easily triple.”
“What concerns me,” says Hildebrand, “is the cost of compliance to these medium-sized and smaller companies.” According to BKD’s Bennett, the industry is “looking at 50 to 75 percent increases and possible limits on the amounts of coverage.” Bennett, whose firm serves companies with annual revenues under $100 million, adds that “what gets passed to clients ultimately” is still unclear.
These increases, of course, have more impact on smaller companies. “It’s just ridiculous” that simply because you’re a public company, however small, “you have to bear the same costs and burdens as a Fortune 100 company,” says John Clary, CEO of Monrovia, California-based Clary Corp. One way to lighten the load, affirms Clary, is to go private.
How many executives at smaller companies will start seeing things the way Clary does? (See “Same Straw, Smaller Back.”) If new regulations and poor returns drive many smaller companies from the public markets, Group B firms may end up losing as much business as they gain. But even more tellingly, as Grant Thornton’s Starr observes, “we as a profession have lost the public trust.” Until the public regains that confidence, liability insurance and burgeoning regulations will remain troublesome, and the Second Six will find it difficult to step out of the second rank.
The Big 8
As of a decade ago, the names of the Big 8 accounting firms were Arthur Andersen, Coopers and Lybrand, Deloitte Haskins and Sells, Ernst and Whinney, Peat Marwick Mitchell (later KPMG Peat Marwick), Price Waterhouse, Touche Ross, and Arthur Young.